Why finance managers rely on supply chain finance: a guide to the finance tool
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Greensill Capital’s struggles have highlighted the growing use of supply chain finance, a tool that gives companies the ability to extend their payment terms to suppliers.
Regulators and standard setters are closely monitoring whether and how companies disclose their use of the funding tool, which has become a priority amid recent issues seen at Greensill, a leading provider of supply chain finance. The company filed for insolvency earlier this month and is under regulatory review.
How does supply chain finance work?
As part of a supply chain finance agreement, banks provide finance to pay a company’s supplier of goods and services. The supplier is then paid sooner, but less, than he would be without the agreement.
For small vendors, financing can provide cash for their operations without large companies extending their payment terms, potentially by several months.
The company pays the money it owes the supplier to the bank, often later than it would have paid its supplier. The bank keeps the amount that it does not pay the provider in exchange for its services.
Supply chain finance has been around for decades. Businesses started using it more frequently after the 2008 financial crisis, when many businesses wanted to conserve cash by extending payment terms with suppliers.
Since then, the market for this short-term borrowing tool has grown, with banks and other vendors offering digital tools to help businesses manage related processes, such as purchasing, according to professional services companies KPMG. LLP, PricewaterhouseCoopers LLP and the
Hackett Group Inc.
Which companies can use supply chain finance?
Large manufacturers, such as aircraft manufacturers
and other global companies, including the producer of soft drinks
are avid users of supply chain finance to extend payment terms.
But there is usually a barrier to entry for some businesses, especially those with lower credit scores. These ratings help determine the discount rate applied to the payment the supplier receives. The better a company’s credit rating, the less expensive it is for the provider to participate in the program.
“Small businesses just have to deal with the fact that their discount rates are pretty high,” said Rudi Leuschner, associate professor of supply chain management at Rutgers University.
It is not known how many companies have supply chain finance programs. Twenty-seven S&P; 500 companies indicated in their 2020 annual reports that they use the tool, up from 13 the previous year, according to data provider MyLogIQ. Between 2015 and 2019, an average of about eight S&P; 500 companies reported using supply chain finance.
Who are the suppliers?
Large financial institutions, including
& Co. and
Citigroup Inc.,
are the most frequent providers of supply chain finance. Banks provide capital and manage programs for businesses.
In recent years, fintech and logistics companies have also started providing such financing, sometimes through partnering with a bank, along with other billing and procurement services, KPMG advisers, PwC said. and Hackett.
Greensill, a provider in this space, is supported by
Vision Fund and targets lesser known and higher risk borrowers as well as good quality companies such as
and
It’s unclear how well Greensill’s supply chain program compares to those of the big banks.
Greensill’s operations were put on hold this month after it was unable to renew credit insurance policies that
and other investors who were relied on to make investments safer. Credit Suisse then froze its investment funds and regulators took over the German bank from Greensill. Greensill on March 8 filed for insolvency protection.
Why do CFOs rely on supply chain finance?
The financing agreement frees up money without much expense and effort, which is a benefit for CFOs who want to keep their money longer. They record the amount owed as accounts payable on their balance sheet, unlike a traditional loan. This makes the liquidity position of their companies more solid.
for example, has strived to better manage debt through supply chain finance, CFO John Murphy said in November. The company launched its program in 2014, but only disclosed it last year because it didn’t have a significant impact on its cash flow, Coca-Cola told the Securities and Exchange Commission. Coca-Cola made disclosures about the program in July after the SEC questioned the company about it in June.
Coca-Cola declined to name the two financial institutions it uses for its supply chain finance program, but a company spokesperson said it has no involvement with Greensill.
Some companies avoided the arrangement.
CFO John Howard said a supply chain finance program would not have much financial value to the company. The Providence, RI-based consumer goods wholesaler continues to assess whether to pursue the tool in the event that it faces market volatility or issues managing its inventory, Howard said. .
What happened during the pandemic?
The pandemic has sped up use of the tool, business advisers and accountants have said. Supply chain financing has provided businesses with a key source of liquidity as they battled the fallout from the pandemic, while allowing them to continue paying important suppliers.
“Supply chain finance is fundamentally about cash management. And money is king, especially now in light of the tensions we see on supply chains, ”said Mark Hermans, managing director of operations consulting at PricewaterhouseCoopers, which focuses on chain finance. supply.
Where are the regulators at?
U.S. companies are not required to disclose supply chain finance agreements in their files, but the SEC in recent months asked some of them to provide more information to help investors assess potential risks. The regulator issued guidelines last June urging companies to provide solid and transparent information on supply chain and other short-term finance during the pandemic.
The Financial Accounting Standards Board, which sets accounting rules for U.S. businesses and nonprofits, last October launched a project to explore potential disclosure requirements. The FASB has yet to produce a proposal on the matter, but plans to discuss the matter at a board meeting this spring, a spokesperson said.
Lack of information about companies’ supply chain programs impacts the key financial metrics used to assess a company’s health, and therefore can cause problems for shareholders and other users of financial statements.
“Some companies tell you they’re participating and they tell you the size, but there are a lot of others that don’t,” said David Zion, director of accounting and tax firm Zion Research Group.
—Nina Trentmann contributed to this article
Write to Mark Maurer at [email protected] and Kristin Broughton at [email protected]
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